Wescast Reports Second Quarter Sales And Earnings
BRANTFORD, Ontario--Aug. 4, 2005--Wescast Industries Inc. (TSX:WCS.SV.A) today reported 2005 second quarter revenues of $102.8 million and net earnings for the quarter of $5.0 million. "We continue to address the challenges faced by the automotive industry, namely high raw material costs and the impact of global competition on market pricing. We have taken aggressive steps to meet these challenges and to position our manufacturing operations in North America for the future," said Ed Frackowiak, Wescast Chairman and C.E.O. "We have begun to see the positive impact of these actions and are confident they will yield significant benefits over the medium-term."Highlights
- Wescast revenues were $102.8 million, down 5.0% over the $108.2 million reported in the same quarter last year, a result of softer market conditions compared with 2004 and the continued impact of programs that were lost to offshore competition during the second half of 2004.
- The Company reported net earnings for the quarter of $5.0 million compared with $11.1 million in the second quarter of 2004. Continuing operations generated $5.5 million in net earnings for the quarter, this compares with net earnings from continuing operations of $15.6 million generated over the same period in 2004.
- Net earnings per share on a diluted basis were $0.38 for the second quarter of 2005, compared with $0.76 earned over the same period in 2004. Continuing operations generated earnings per share on a diluted basis of $0.42, compared with earnings per share from continuing operations of $1.10 in the second quarter of 2004.
- The Company's primary customer base, the domestic Big 3, experienced a 7.1% decline in light vehicle production levels in the second quarter of 2005. This outpaced the overall decline in production levels of 1.7% reported for the North American automotive industry during the quarter and reflects the efforts made by these automakers to reduce vehicle inventory levels.
- Subsequent to the end of the quarter the Company entered into a purchase and sale agreement to dispose of the land, building and the majority of the production assets associated with its foundry operation in Brantford, Ontario. The transaction is expected to be completed during the third quarter of 2005.
Operations
Consolidated sales for the quarter were $102.8 million, a 5.0% decline over the previous year's level of $108.2 million.
The sale of powertrain products in North America, excluding prototype and tooling sales, decreased by 16.6% compared to the same period in 2004. Revenues for the quarter were $83.2 million compared with $99.8 million in 2004. The Company experienced a year-over-year decline in unit sales volume in North America of 12.9%. The volume and revenue decline resulted from:
- The impact of overall market conditions, specifically the decline in vehicle production levels reported by the domestic Big 3, the Company's primary customer base.
- The impact of market driven price reductions compared to the same quarter last year.
- A reduction in volumes to Ford, reflecting the impact of programs resourced to Asian suppliers in the second half of 2004.
- Lower volume requirements to Nissan.
The factors above were partially offset by increased volumes with DaimlerChrysler as new programs with this customer ramp up to full capacity.
Revenues generated by the Company's operation in Hungary, excluding prototype and tooling sales, were $13.9 million for the quarter. This compares with $6.3 million recorded during the same quarter last year. Much of this growth represents the increase in the Company's proportionate share of revenues compared with the second quarter of 2004. On August 31, 2004 the Company's proportionate ownership interest in the operation increased from 50% to 100%. Excluding the impact of the ownership change, revenues on a non-proportionate basis generated by the operation in Hungary in the second quarter of 2005 increased by 10.3% over the same period in 2004. The impact of recent new program launches in Hungary has been largely offset by soft market conditions.
Consolidated revenues from prototype and tooling sales in the second quarter were $5.7 million, compared with the $2.1 million recorded in the second quarter of 2004.
Earnings from continuing operations of $5.5 million were reported for the quarter, compared with earnings from continuing operations of $15.6 million reported in the second quarter of 2004.
The Company's North American powertrain operations reported net earnings of $7.7 million or 8.7% of sales, a decline from the net earnings of $16.3 million or 16.0% of sales reported in the second quarter of 2004.
The decline resulted from the impact of:
- Higher raw material and other commodity prices compared with 2004, specifically moly and electricity;
- Market driven sales price reductions; and,
- Lower casting sales volumes.
The impact of these factors was partially offset by the positive benefits from:
- The impact on the Company's fixed cost structure associated with the implementation of its foundry optimization plan and the gradual rationalization of production requirements during the quarter from the Brantford foundry into the Company's other facilities. This initiative is on schedule and will be completed in advance of the sale of the facility.
- Improved operating performance in the manufacturing facilities, measured in terms of uptime and scrap rates; and,
- The impact of Company-wide cost reduction initiatives. These initiatives accounted for the 22% reduction in selling, general and administrative expenses during the quarter compared to the same period last year.
The operation in Hungary generated a net loss of $2.2 million during the quarter compared with a $0.7 million net loss reported in the same period in 2004. The majority of the increased loss resulted from the increase in our proportionate ownership interest in the operation and the impact of increased depreciation charges. On a non-proportionate basis, the loss generated by the operation in Hungary was higher than the same period in 2004. The higher loss was a result of higher raw material costs and additional depreciation charges incurred by the operation compared with last year. The higher depreciation reflects the impact of new machines put into service over the past year. The business continues to develop as evidenced by improved uptime performance, however its financial performance reflects the costs associated with ramping-up the manufacturing facilities and the costs associated with new product launches. The impact of recent product launches is expected to contribute positively to the profitability of this operation in future periods.
The Company's Chassis business, which is classified as discontinued operations, generated a net loss of $0.5 million for the quarter, compared with a net loss of $4.5 million reported in the second quarter of 2004. Production activities of this business have been concluded. The Company is reviewing options to dispose of the manufacturing assets and property associated with the operation.
The Company showed continued improvement in its financial condition during the quarter as debt levels were further reduced. Anticipated proceeds from the sale of the Brantford facility and other asset sales are expected in the second half of the year.
A more detailed discussion of the consolidated results for the quarter ended July 3, 2005 is contained in the attached Management's Discussion and Analysis which follows the interim consolidated financial statements and the notes thereto.
About Wescast
Wescast Industries Inc. is the world's largest supplier of exhaust manifolds for passenger cars and light trucks. The Company designs, casts, machines and assembles high-quality iron exhaust manifolds, turbo charger housings and integrated turbo manifolds for automotive OEMs. The Company's global sales and design activities are coordinated through its technical development centre in Canada and supported by sales and design centres in the United States, Japan and Europe. The Company operates seven production facilities in North America and Europe, including a 49% interest in United Machining Inc., an accredited Minority supplier in Michigan. The Company is recognized worldwide for its quality products, innovative design solutions and highly committed workforce.
Learn more at www.wescast.com.
Forward Looking Statements
Wescast and its representatives may periodically make written or oral statements that are "forward-looking", including statements included in this news release and in our filings with applicable Securities Commissions and in reports to our stockholders. These statements may be identified by words such as "believe," "anticipate," "project," "expect," "intend" or other similar expressions, and include all statements which address operating performance, events or developments that we expect or anticipate may occur in the future (including statements relating to future sales or earnings expectations, volume growth, awarded sales contracts and earnings per share expectations or statements expressing general optimism about future operating results). Such statements involve risks and uncertainties that may cause unanticipated events and actually evolve to be materially different from those either expressed or implied. These factors include, but are not limited to, risks associated with the automotive industry, production, marketing and transportation such as loss of market, volatility of prices, currency fluctuations, environmental risks, competition from other producers and ability to access sufficient capital from internal and external sources; as a consequence, actual results may differ materially from those anticipated in the forward-looking statements. For more detailed information regarding these risks you may refer to Wescast's publicly filed documents with applicable Canadian securities authorities. Wescast undertakes no obligation to update any of these forward-looking statements.
A conference call has been arranged for:
August 4, 2005
3:00 p.m. EST
To participate, please dial (416)-695-9712 Reservation #T557734W or
visit www.wescast.com and log into the live webcast.
Post view is available from August 4, 2005 to August 11, 2005.
To access please dial 416-695-5278 and enter pin #7734
Wescast Industries Inc.
Consolidated Statement of Earnings and Retained Earnings
(in thousands of Canadian dollars, except per share amounts)
(Unaudited Canadian GAAP)
Three months ended Six months ended
------------------------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------------------------------------------
Sales $102,837 $108,189 $205,186 $214,821
Cost of sales 84,787 75,588 171,921 153,025
------------------------------------------
Gross profit 18,050 32,601 33,265 61,796
Selling, general and
administration 6,938 8,922 14,178 18,249
Stock-based compensation (19) (1,778) (33) (1,660)
Research, development and
design 1,448 1,774 2,896 3,447
------------------------------------------
9,683 23,683 16,224 41,760
Other (income) expense
Interest expense 512 45 814 96
Restructuring charge
(Note 3) 0 0 10,500 0
Investment income (33) (191) (50) (360)
Other (income) and
expenses 136 328 (131) 473
------------------------------------------
Earnings from continuing
operations before income
taxes 9,068 23,501 5,091 41,551
Income taxes 3,579 7,902 3,089 14,203
------------------------------------------
Earnings from continuing
operations 5,489 15,599 2,002 27,348
Net loss from discontinued
operations (Note 4) (536) (4,487) (3,687) (8,383)
------------------------------------------
Net earnings (loss) $4,953 $11,112 ($1,685) $18,965
------------------------------------------
------------------------------------------
Earnings from continuing
operations per share
(Note 6)
- basic $0.42 $1.19 $0.15 $2.09
------------------------------------------
------------------------------------------
- diluted $0.42 $1.10 $0.15 $2.00
------------------------------------------
------------------------------------------
Net earnings (loss) per
share (Note 6)
- basic $0.38 $0.85 ($0.13) $1.45
------------------------------------------
------------------------------------------
- diluted $0.38 $0.76 ($0.13) $1.36
------------------------------------------
------------------------------------------
Retained earnings,
beginning of period $278,895 $325,678 $286,319 $319,397
Net earnings (loss) 4,953 11,112 (1,685) 18,965
Dividends paid (787) (1,572) (1,573) (3,144)
------------------------------------------
Retained earnings, end of
period $283,061 $335,218 $283,061 $335,218
------------------------------------------
------------------------------------------
Wescast Industries Inc.
Consolidated Balance Sheet
(in thousands of Canadian dollars) (Unaudited Canadian GAAP)
As at
July 3, January 2,
2005 2005
-----------------------------
Current assets
Cash and cash equivalents $1,281 $3,745
Receivables 61,594 66,758
Income taxes receivable 0 7,441
Inventories 35,655 38,580
Prepaids 2,465 2,539
Future income taxes 1,187 1,177
Current assets - discontinued
operations (Note 4) 2,519 10,096
-----------------------------
104,701 130,336
Property, plant and equipment 339,883 364,690
Future income taxes 53,887 50,427
Other 465 595
Long-term assets - discontinued
operations (Note 4) 8,869 10,463
-----------------------------
$507,805 $556,511
-----------------------------
-----------------------------
Current liabilities
Payables and accruals $31,861 $44,148
Income taxes payable 86 0
Current portion of long-term debt 1,318 2,091
Current portion of stock appreciation
rights 81 117
Future income taxes 96 96
Restructuring accrual (Note 3) 8,215 0
Current Liabilities - discontinued
operations (Note 4) 855 38,279
-----------------------------
42,512 84,731
Long-term debt 35,145 28,472
Deferred government assistance 2,575 2,341
Future income taxes 22,507 20,319
Employee benefits 15,270 15,051
-----------------------------
118,009 150,914
-----------------------------
Shareholders' equity
Capital stock (Note 5) 110,505 110,374
Retained earnings 283,061 286,319
Share purchase loans (263) (650)
Cumulative translation adjustment (3,507) 9,554
-----------------------------
389,796 405,597
-----------------------------
$507,805 $556,511
-----------------------------
-----------------------------
Wescast Industries Inc.
Consolidated Statement of Cash Flows
(in thousands of Canadian dollars) (Unaudited Canadian GAAP)
Three months ended Six months ended
------------------------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------------------------------------------
Cash derived from
(applied to)
Operating
Earnings (loss) from
continuing operations $5,489 $15,599 $2,002 $27,348
Add (deduct) items not
requiring cash:
Depreciation and
amortization 9,400 8,227 19,213 17,232
Amortization of
bond costs 50 4 95 8
Future income taxes 978 330 1,856 688
Loss on disposal
of equipment 214 386 384 569
Deferred government
assistance 169 126 234 286
Stock-based compensation,
net of payments (22) (1,963) (36) (2,100)
Employee benefits,
net of payments (309) 825 219 1,639
------------------------------------------
15,969 23,534 23,967 45,670
Change in non-cash
operating working
capital (Note 7) (5,721) 9,691 9,404 (2,199)
------------------------------------------
10,248 33,225 33,371 43,471
Discontinued operations 322 (5,778) (3,452) (11,872)
------------------------------------------
10,570 27,447 29,919 31,599
------------------------------------------
Investing
Purchase of property, plant
and equipment and other
assets (3,594) (9,561) (7,022) (14,063)
Proceeds on disposal of
equipment 291 194 296 280
Discontinued operations (10) (1,527) 1,046 (2,477)
------------------------------------------
(3,313) (10,894) (5,680) (16,260)
------------------------------------------
Financing
Issue of long-term debt 6,993 277 26,102 395
Repayment of long-term
debt (12,804) (737) (20,084) (1,200)
Payment of credit facility
fees 0 0 (11) 0
Payment of obligations
under capital leases (77) (145) (229) (289)
Issuance of common shares 54 96 131 193
Employee share purchase
loan repayments 0 141 387 166
Dividends paid (787) (1,572) (1,573) (3,144)
Discontinued operations 0 (2,023) (31,426) (2,023)
------------------------------------------
(6,621) (3,963) (26,703) (5,902)
------------------------------------------
Net increase (decrease) in
cash and cash equivalents 636 12,590 (2,464) 9,437
Cash and cash equivalents
Beginning of period 645 25,205 3,745 28,358
------------------------------------------
End of period $1,281 $37,795 $1,281 $37,795
------------------------------------------
------------------------------------------
Wescast Industries Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(Unaudited Canadian GAAP)
Note 1. Basis of presentation
The unaudited interim consolidated financial statements ("interim financial statements") have been prepared following the accounting policies as set out in the annual consolidated financial statements for the year ended January 2, 2005 included in the Company's 2004 Annual Report to Shareholders.
The disclosures in these interim financial statements do not conform in all respects to the requirements of generally accepted accounting principles for annual consolidated financial statements. These interim financial statements should be read in conjunction with the most recent annual consolidated financial statements for the year ended January 2, 2005.
The interim financial statements and the notes thereto have not been reviewed by the company's external auditors pursuant to a review engagement applying review standards set out in the CICA handbook.
Note 2. Recent accounting pronouncements and changes in accounting policies
In June 2003, the CICA issued Accounting Guideline 15 ("AcG-15"), "Consolidation of Variable Interest Entities". AcG-15 requires that an enterprise holding other than a voting interest in a Variable Interest Entity ("VIE") could, subject to certain conditions, be required to consolidate the VIE if it is considered its primary beneficiary whereby it would absorb the majority of the VIE's expected losses and/or receive the majority of its expected residual returns. The Company has concluded that it has no VIEs, as a result the adoption of the guideline had no impact on the Company's interim financial statements.
Note 3. Restructuring Charge
On February 23, 2005, the Company announced that its Board of Directors had approved a foundry optimization plan for its North American operations aimed at significantly lowering operating costs through the effective utilization of foundry assets. As a result, the Company indicated that its foundry operation in Brantford, Ontario would be closed during fiscal 2005 following transfer of the plant's production requirements to the Company's other facilities. Although it is not possible at this time to determine the exact costs that may result from this closure, the Company estimated and recorded during the first quarter of 2005 a one-time charge to pre-tax earnings of $10.5 million representing anticipated severance and other benefit costs associated with workforce reductions. Approximately $2.3 million of this accrual was paid out during the second quarter of 2005 to coincide with reductions in the workforce. On July 26, 2005 the Company entered into an agreement to dispose of the assets associated with the foundry operation (see Note 11).
Note 4. Discontinued Operations
Included in discontinued operations are the Company's chassis business conducted at its Cordele, Georgia operations and its stainless steel manifold business.
Production activities were concluded during the quarter and the chassis business wound down. The carrying value of the chassis business has been adjusted to reflect the estimate of its net realizable value. The Company is pursuing buyers for the manufacturing assets and property.
The Company approved a plan to shut down its stainless steel manifold business in 2001. All costs associated with the shut-down were reflected in the Company's 2001 fiscal year. The shut-down was completed as of June 30, 2002. The Company is currently pursuing buyers for the remainder of the manufacturing assets; the carrying value of these assets reflects the estimate of their net realizable value.
Note 5. Capital stock
Authorized
Unlimited Preference shares, no par value
Unlimited Class A subordinate voting common shares, no par value
9,000,000 Class B multiple voting common shares, no par value
July 3, January 2,
2005 2005
Issued and outstanding
5,735,500 Class A Common shares
(2004 - 5,730,268) $98,078 $97,947
7,376,607 Class B Common shares
(2004 - 7,376,607) 12,427 12,427
--------------------------
$110,505 $110,374
--------------------------
--------------------------
Note 6. Earnings per common share
Basic earnings per share from continuing operations and basic net earnings per share for the three months ended July 3, 2005 and June 27, 2004 are based on the weighted average common shares outstanding (2005 - 13,094,798 shares; 2004 - 13,065,256). Diluted earnings per share from continuing operations and diluted net earnings per share for the three months ended July 3, 2005 and June 27, 2004 are based on the diluted weighted average common shares outstanding (2005 - 13,114,998 shares; 2004 - 13,165,247 shares).
Basic earnings per share from continuing operations and basic net earnings (loss) per share for the six months ended July 3, 2005 and June 27, 2004 are based on the weighted average common shares outstanding (2005 - 13,094,875 shares; 2004 - 13,065,350 shares). Diluted earnings per share from continuing operations and diluted net earnings (loss) per share for the six months ended July 3, 2005 and June 27, 2004 are based on the diluted weighted average common shares outstanding (2005 - 13,115,389 shares; 2004 - 13,114,998 shares).
Note 7. Consolidated statement of cash flows
The following is additional information to the statement of cash
flows.
Change in non-cash operating
working capital Three months ended Six months ended
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
-------------------------------------------
Receivables ($313) $8,163 $5,206 ($5,359)
Inventories 3,668 (4,053) 2,925 (2,629)
Prepaids 384 316 74 422
Payables and accruals (10,553) 3,600 (14,543) 3,479
Restructuring charge (2,285) 0 8,215 0
Income taxes receivable
/ payable 3,378 1,665 7,527 1,888
-------------------------------------------
($5,721) $9,691 $9,404 ($2,199)
-------------------------------------------
Note 8. Employee benefits
The Company's net benefit plan expense, which is recorded in cost of sales and selling, general and administrative expenses, is as follows:
Three months ended Six months ended
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------------------------------------------
Pension benefit plan $635 $780 $1,221 $1,561
Other benefit plans 251 202 502 404
------------------------------------------
$886 $982 $1,723 $1,965
------------------------------------------
Note 9. Segment Information
The Company operates in the automotive industry in two geographic segments, North America and Europe. The Company's manufacturing facilities, where appropriate, are geographically situated to align with the physical location of its customer base. The Company evaluates segment performance based on earning or loss before income taxes.
There were no intersegment sales during the three months ended July 3, 2005. All Corporate costs not directly allocated to the European operation have been allocated to the North American segment.
Three months ended
July 3, 2005 June 27, 2004
----------------------------------------------------
North North
America Europe Total America Europe Total
----------------------------------------------------
Sales to
external
customers $88,940 $13,897 $102,837 $101,733 $6,456 $108,189
Net earnings
(loss) 7,725 (2,236) 5,489 16,279 (680) 15,599
Interest revenue 33 0 33 191 0 191
Interest expense 512 0 512 45 0 45
Depreciation and
amortization 7,406 1,994 9,400 7,367 860 8,227
Income taxes 3,561 18 3,579 7,879 23 7,902
Purchase of
property,
equipment and
other assets $3,053 $541 $3,594 $7,925 $1,636 $9,561
---------------------------------------------------------------------
Six months ended
July 3, 2005 June 27, 2004
----------------------------------------------------
North North
America Europe Total America Europe Total
----------------------------------------------------
Sales to
external
customers $178,035 $27,151 $205,186 $201,965 $12,856 $214,821
Net earnings
(loss) 7,147 (5,145) 2,002 29,201 (1,853) 27,348
Interest revenue 50 0 50 360 0 360
Interest expense 814 0 814 96 0 96
Depreciation
and amortization 15,010 4,203 19,213 15,543 1,689 17,232
Income taxes 3,051 38 3,089 14,158 45 14,203
Purchase of
property,
equipment and
other assets $5,940 $1,082 $7,022 $11,358 $2,705 $14,063
July 3, 2005
North Discontinued
America Europe Operations Total
-----------------------------------------------
Total Assets $377,158 $119,259 $11,388 $507,805
Property and
equipment 240,873 99,010 339,883
---------------------------------------------------------------------
January 2, 2005
North Discontinued
America Europe Operations Total
-----------------------------------------------
Total Assets $382,237 $153,715 $20,559 $556,511
Property and
equipment 250,457 114,233 364,690
---------------------------------------------------------------------
Note 10. Comparative Figures
Certain of the comparative figures have been reclassified to conform with the presentation adopted at July 3, 2005.
Note 11. Subsequent event
On August 3, 2005 the Company's Board of Directors approved a purchase and sale agreement to dispose of the land, buildings and the majority of the production assets associated with its foundry operation in Brantford, Ontario. The transaction, which is expected to be completed during the third quarter of 2005, is contingent upon the satisfactory resolution of various standard commercial and regulatory conditions. Upon completion, the transaction is expected to generate cash proceeds of approximately $26.3 million, a portion of which is contingent on leaving certain production volumes in the plant for a period extending twelve months beyond the closing date. The Company expects to realize a non-cash charge to pre-tax earnings of approximately $10.0 million, representing the excess of the book value of the assets to be disposed over the proceeds of disposition.
Management's Discussion and Analysis Of Results of Operations and Financial Position For the Three Months Ended July 3, 2005
All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in Canadian dollars unless otherwise noted. This MD&A should be read in conjunction with: the interim consolidated financial statements and notes thereto for the three-month period ended July 3, 2005; the "Management's Discussion and Analysis" included in the Annual Report of Wescast for the year ended January 2, 2005; and with the consolidated financial statements and notes thereto for the year ended January 2, 2005. The accompanying interim consolidated financial statements and the notes thereto have not been reviewed by the Company's external auditors pursuant to a review engagement applying review standards set out in the CICA Handbook.
This MD&A is current to August 2, 2005. Additional information relating to the Company is available online at Sedar.com.
Overview
Wescast Industries Inc. ("Wescast" or the "Company") designs, casts, machines and assembles high-quality engineered iron products for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America and Europe. The Company employs approximately 2,000 skilled and highly committed people in 7 production facilities and 5 sales and design centres in Canada, the United States, Japan and Europe.
Wescast's research and development activities are focused on generating innovative solutions for its customers in product design and the use of high performance materials. The Company continues to focus on the conversion of tubular manifolds to cast with current and potential customers around the world. A number of initiatives are underway in this area and in the development of other hot-end solutions to better meet the needs of the customer.
The Company's resources are strategically aligned to meet unique, customer-specific requirements. The Company believes that the combination of its design capability and high-quality manufacturing creates unique value for the customers in the markets that it serves. The Company believes this is the reason that it is the world's largest supplier of exhaust manifolds for passenger cars and light truck applications.
The Company's resources are focused on the execution of its global powertrain strategy. The Company's powertrain business is focused on the design and manufacture of exhaust system components for sale primarily to OEM and Tier 1 customers for application in the passenger car and light truck markets in North America and Europe. The Company's powertrain operations in North America are well established and consist of 6 production facilities. The European powertrain operations are conducted through a production facility in Hungary, Wescast Autoipari, Rt., a relatively new operation. Prior to August 31, 2004 the facility, formerly named Weslin Autoipari, Rt., was jointly owned and managed by Wescast and Linamar Corporation ("Linamar"). On August 31, 2004 Wescast acquired the remaining 50% interest in this operation from Linamar.
In July of 2004 the Company announced its decision to exit the Chassis business conducted at its Cordele, Georgia facility. This business was focused on the design and manufacture of brake and suspension components for sale to OEM and Tier 1 customers. This business is reflected as a discontinued operation. Production activities related to this business were concluded during the first quarter of this year. At this time the Company is pursuing buyers for the manufacturing assets and property.
The following MD&A focuses on the powertrain segment.
Current Market Conditions
North American light vehicle production volumes for the quarter totaled approximately 4.1 million units, a 1.7% decrease from the 4.2 million units produced for the same period in 2004. Production during the quarter by the domestic Big 3 automakers, that comprise the Company's primary customer base, was down 7.1% over the same period. The Big 3 production decline in the quarter was in response to lower vehicle sales levels and their efforts to reduce vehicle inventory levels.
Results from Operations
Sales
Consolidated sales for the quarter were $102.8 million, a decrease of 5.0% over the previous year's level of $108.2 million.
- Revenues from the sale of powertrain products in North America, comprised of cast and machined iron manifolds, decreased by 16.6% compared with the same period in 2004. Revenues, excluding prototype and tooling revenues, were $83.2 million compared to $99.8 million in 2004. Unit sales of cast manifolds of 3.2 million units reflected a decline of 12.9% from the second quarter of 2004. The reduction in volume and revenue was primarily the result of the following:
- A year-over-year decline in market conditions, specifically the 7.1% decline in production experienced during the quarter by the Company's primary customer base, the domestic Big 3 automakers.
- The impact of market driven price reductions compared to the same quarter last year.
- A reduction in volumes to Ford, reflecting the impact of programs resourced to Asian suppliers.
- A reduction in volumes to Nissan, reflecting changes in the customer's demand requirements.
The factors above were partially offset by increased volumes with DaimlerChrysler as new programs ramp up to full volume levels.
Revenues generated by the Company's operations in Hungary, excluding prototype and tooling sales, were $13.9 million for the quarter. This compares with $6.3 million recorded during the same quarter last year. Much of this growth represents the increase in the Company's proportionate share of revenues compared with the second quarter of 2004. On August 31, 2004 the Company's proportionate ownership interest in the operation increased from 50% to 100%. Excluding the impact of the ownership change, revenues for the European operation increased by 10.3% over the second quarter of 2005. The increase resulted from increased unit volumes which rose by 3% and the increase in revenue associated with a higher mix of parts that were both cast and machined. The impact of recent program launches in Hungary has been largely offset by soft market conditions.
Consolidated revenue from prototype and tooling sales for the quarter were $5.7 million, a significant increase over the $2.1 million recorded in the second quarter of 2004. Revenues associated with prototypes and tooling are a function of the timing of customer programs, making year-over-year comparisons difficult.
On a year-to-date basis, sales of $205.2 million were 4.5% lower than the $214.8 million reported during the first six months of 2004. The decline is a result of the lower casting sales in North America and the impact of market driven price reductions. The revenue declines in North America were partially offset by increased revenues in Hungary reflecting the Company's acquisition of the remaining 50% interest in this operation in the third quarter of 2004.
Gross Profit
Gross profit for the quarter was $18.1 million, which represents a decline of 44.6% compared with the $32.6 million reported in the second quarter of 2004. The decline was the result of several factors as follows:
- The North American powertrain business generated lower gross profit due to the effects of:
- The impact of the lower casting sales volumes;
- The impact of market driven price reductions; and
- Increases in raw material and other commodity prices that resulted in year-over-year increases in manufacturing costs for the quarter of $5.7 million.
The impact of operating performance improvements and savings generated through cost reduction initiatives in the manufacturing facilities partially offset the impact of these factors.
- The Company's operation in Hungary continues to focus on launch activities and improving performance metrics, including equipment uptime and scrap rates. The operation has yet to reach the production levels required to achieve a breakeven position. In addition, similar to the North American business, the operation in Europe is being impacted by the rising raw material and commodity prices and soft market conditions.
Also contributing to the decline in gross profit was the increase in year-over-year depreciation and amortization. Depreciation and amortization costs included in cost of sales during the quarter were $8.2 million, an increase of $1.7 million over the $6.5 million recorded in the second quarter of 2004. The increase reflected increased depreciation in Hungary, a significant portion of which resulted from the increase in the proportionate ownership in this operation.
On a year-to-date basis the Company's gross profit of $33.3 million represented a decline of $28.5 million, compared with the $61.8 million reported in the first six months of 2004. The decline reflects the impact of customer driven price reductions and increased raw material and commodity prices on the core powertrain business and the recognition during 2005 of 100% of the losses associated with the ramp-up of the Hungarian operations.
Selling, General and Administration
The Company's selling, general and administrative costs for the quarter were $6.9 million, a decrease of $2.0 million or 22% over the $8.9 million incurred in the same period in 2004. The decrease resulted from reductions in year-over-year costs associated with flexible compensation costs, severances and pension costs. In addition, the lower costs reflect the impact of cost reduction efforts being implemented within the various administrative departments. As a percentage of sales, these expenses decreased from 8.2% in the second quarter of 2004 to 6.7% in 2005. Included in selling, general and administration expenses for the quarter was depreciation of $1.2 million, down $0.5 million from the $1.7 million in the second quarter of 2004.
Stock-based Compensation
In connection with options granted under the Company's stock option plan, participants are granted tandem stock appreciation rights. Under the plan, participants have the choice of exercising stock options or receiving cash from the Company for the options equal to their intrinsic value, being the difference between the option exercise price and the current market value of the shares. The increase or decrease in the intrinsic value of the stock options is included as stock-based compensation expense. In the second quarter of 2004 a decrease in the market price of the Company's shares resulted in a positive impact of $1.8 million on pre-tax earnings. In the second quarter of 2005 the market price of the Company's shares was stable and the impact of stock based compensation expense was negligible.
Research, Development and Design
The Company's research, development and design expenses of $1.4 million this quarter were down from the $1.8 million incurred over the same period of 2004. The Company remains committed to funding customer focused research and development activities. The reduced spending this quarter was a result of a company-wide focus on cost reduction initiatives resulting in lower discretionary spending.
Restructuring Charge
In February of 2005 the Company announced that a foundry optimization plan for its North American operations had been approved by its Board of Directors. The plan is aimed at significantly lowering operating costs through the effective utilization of foundry assets. As a result, the Company will close its foundry operation in Brantford, Ontario during fiscal 2005 following the transfer of the plant's production requirements to the Company's other facilities. Although it is not possible at this time to determine the exact costs that may result from this closure, the Company estimated and recorded during the first quarter of 2005 a one-time charge to pre-tax earnings of $10.5 million representing anticipated severance and other benefit costs associated with workforce reductions. The cash flow associated with this charge is being incurred as the reduction in the workforce takes place over the remaining months of the year. The workforce reductions correspond with the specific timing of production requirements being transferred to other Wescast facilities. The accrual was reduced by approximately $2.3 million during the quarter as the initial phases of the transition out of the facility were completed.
Interest Expense
Interest expense for the quarter of $0.5 million was up from the $0.1 million incurred over the same period in 2004.
Income Taxes
The effective tax rate reflected for the quarter was 39.5 %, compared with a rate of 33.6% in 2004. The operation in Hungary is eligible for a tax holiday, with earnings not subject to income taxes during the first ten years of operations. Consequently no tax benefit has been recognized with respect to the losses generated in Hungary, reducing the rate of tax otherwise recoverable on the consolidated loss reported during the quarter.
Financial Condition, Liquidity and Financial Resources
At July 3, 2005 the Company had cash balances of $1.3 million and net debt of $35.2 compared with cash balances of $3.7 million and net debt of $57.5 million at the end of 2004. During the second quarter, cash flows generated from operations net of capital expenditures and dividend payments were applied to reduce long-term debt. The net debt reduction during the quarter was $5.8 million.
Operating Activities
The Company generated $10.3 million in cash from continuing operations during the second quarter, compared with $33.2 million in cash generated during the second quarter of 2004. The decrease was primarily attributable to lower earnings from operations and changes in non-cash working capital in North America. Cashflow invested in non-cash working capital during the quarter was $5.7 million, this compares with cash generated from non-cash working capital of $9.7 million in the second quarter of 2004.
Investing Activities
Capital expenditures for the second quarter were $3.6 million, which were $6.0 million lower than the $9.6 million incurred over the same quarter last year. Capital expenditures are being closely monitored. Capital spending approvals are focused on projects required to meet specific capacity requirements, those generating a rapid payback or expenditures required to meet safety or environmental initiatives.
Financing Activities
Net repayments of long-term debt during the quarter totaled $5.8 million. Dividends paid during the quarter were $0.06 per common share, compared with $0.12 per share in the second quarter of 2004.
Financing Resources
At July 3, 2005 the Company was in a strong financial position. The Company had net debt outstanding at the end of the second quarter of $35.2 million compared with $57.5 million at the end of 2004. At July 3, 2005, the Company had $88.8 million of unused and available credit under a multi-year committed borrowing facility to fund operating needs and growth initiatives, if required.
Shareholders Equity
Shareholders' equity at the end of the quarter was $389.8 million, a decrease from $405.6 million at January 2, 2005. The decrease resulted from the impact of the net loss recorded year-to-date during 2005 and the decrease in the value of the cumulative translation adjustment account over the same period. The cumulative translation adjustment account represents the unrealized change in the value of the Company's investments in its self-sustaining subsidiaries operating in foreign currencies and translated to Canadian dollars at current rates of exchange. The change during the first six months of 2005 has resulted from exchange fluctuations associated with the investment in Hungary.
Subsequent Event
On August 3, 2005 the Company's Board of Directors approved a purchase and sale agreement to dispose of the land, buildings and the majority of the production assets associated with its foundry operation in Brantford, Ontario. The transaction, which is expected to be completed during the third quarter of 2005, is contingent upon the satisfactory resolution of various standard commercial and regulatory conditions. Upon completion, the transaction is expected to generate cash proceeds of approximately $26.3 million, a portion of which is contingent on leaving certain production volumes in the plant for a period extending twelve months beyond the closing date. The Company expects to realize a non-cash charge to pre-tax earnings of approximately $10.0 million, representing the excess of the book value of the assets to be disposed over the proceeds of disposition.
Outlook
Although there can be no certainty as to future levels of production, current industry estimates project that the automotive industry in North America will remain stable in 2005. While there have been signs of softening in recent months it is projected that North American light vehicle production levels will be in the range of 15.6 to 15.8 million vehicles, consistent with the 15.8 million units achieved in 2004. However, it is also projected that market share declines will result in lower production levels by the Company's primary customer base, the domestic Big 3 automakers.
The Company anticipates that its 2005 production levels of its North American Powertrain business will not achieve the levels reached in 2004, primarily a result of the lower production volumes projected for its customer base and the annualized impact of production programs re-sourced to low-cost country suppliers during 2004. These declines will be offset by new programs in North America together with new product launches in Europe.
The Company's results are sensitive to raw material prices for scrap steel and moly. Scrap steel prices fell in the second quarter compared with the preceding quarter; however the price of moly has remained at or near record highs. If these prices are maintained throughout 2005, Wescast will pay significantly more in total for scrap steel and moly than was incurred in 2004.
The Company's strategic direction is the pursuit of a global powertrain strategy capable of generating attractive growth and strong financial return prospects for our stakeholders:
- The focus of the core Powertrain segment in North America will be on becoming more cost-competitive in an effort to address the significant pressure on pricing that is being exerted by the powertrain customer base. This pressure has intensified with the growing threat from competitors based in low-cost countries, specifically China. To meet this challenge the Company will continue to pursue aggressive year-over-year cost-reduction targets in these operations. Progress has been made toward achieving these targets by applying the Company's HEART participative management process and continuous improvement focus. To date many cost-reduction initiatives have been proposed and are being implemented.
- The Company will also focus on aligning its global capacity to meet the needs of its customers in the most efficient manner available. This includes the closure of the foundry operations in Brantford, Ontario. This element of the Company's foundry optimization plan is expected to reduce the Company's fixed costs significantly in the fourth quarter of 2005, with full year benefits in 2006. These reductions were initiated with the first phase of manpower reductions made this quarter, further reductions will be phased in over the remainder of 2005 as production is transferred to other Wescast facilities. There will be costs incurred during 2005 associated with the closure, including the severance and benefit costs that were accrued in the first quarter. The nature and magnitude of other potential costs are currently being quantified, however if the recently announced transaction to sell the Branford foundry assets is concluded, a non-cash charge associated with the loss on disposal of these assets is expected to be approximately $10 million.
- The Company will continue to focus on expanding its powertrain business through the expansion of its customer base and geographic coverage. This includes completing the foundry and machining ramp-up of the operation in Hungary. The successful completion of the ramp-up is expected to generate significant improvements in Wescast results in 2006.
- The Company will maintain its commitment to fund research and development activities, including:
- The deployment to customers of the "hot-end solutions" strategy; and,
- The continued development of high-temperature alloys.
- The successful closure of the Chassis business has eliminated the negative impact that this operation has had on Wescast finances.
- the Company's Board of Directos has given approval to proceed with the initial steps necessaryt to establish a facility in China, which includes the acquisition of property, design of the facility and the hiring of senior Chinese management.
The Company believes that maintaining the focus on these areas is the best means to ensure the long-term success of the business.
Forward-Looking Information
Certain information provided by Wescast in this MD&A and in other documents published throughout the year that is not a recitation of historical facts may constitute forward-looking information, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "estimate", "anticipate", "believe", "expect", and similar expressions are intended to identify forward-looking statements. Such forward-looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward-looking statements made by, or on behalf of the Company. These risks and uncertainties include, but are not limited to, global economic and industry conditions causing changes to production volumes, changes in raw material and other input costs, price reduction pressures, dependence on certain vehicles and major OEM customers, program launch delays, currency exposure, contract negotiations with the unionized workforce, failure in implementing Company strategy, technological developments by the Company's competitors, government and regulatory policies and changes in the competitive environment in which the Company operates. While the Company believes that its forecasts and assumptions are reasonable, persons reading this report are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such forward-looking statements readers should specifically consider the various factors which could cause actual events or results to differ from those indicated by such forward-looking statements.
Wescast Industries Inc. (TSX:WCS.SV.A)